Showdown Over China’s Property Curbs Simmers After Wuhu Retreat on Easing
China’s local municipalities will press on with efforts to ease property curbs that have slowed the land sales they rely on for revenue, even after two cities retreated in the face of opposition from the central government.
Wuhu and Foshan, smaller cities that get at least 30 percent of their revenue from selling sites, abandoned attempts to lift some restrictions that have hurt prices and sales. Premier Wen Jiabao has reiterated the government won’t waver from its measures to keep housing affordable.
“The local governments are testing the water, but the central government is saying we are not ready yet,” said Andy Rothman, CLSA Asia-Pacific Markets’ Shanghai-based China macroeconomic strategist, who expects officials in Beijing to start allowing their local counterparts to relax housing enforcements in the second quarter.
That is already happening. The southern city of Zhongshan, the hometown of Sun Yat-sen, the founder of modern China, increased a price cap on residential home sales in January, and the western city of Chongqing last month raised the minimum threshold where a property holding tax kicks in.
Tensions between the two levels of authority will be on show next week as officials gather in Beijing for the annual National People’s Congress starting March 5. Land sales fell 13 percent last year from 2010 to 1.9 trillion yuan ($302 billion), according to a SouFun Holdings Ltd. (SFUN) survey of 130 cities, threatening funding for roads, highways and rail lines.
“Smaller cities rely much more on the property industry than big cities, from land sales to deed tax,” said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “We are probably going to hear a lot of complaints from small-city government officials during the NPC about how much their revenue and economy have suffered.”
China has more than 1,000 county-level governments and hundreds of city and municipal councils that get revenue from local taxes, land sales and central-government transfers because rules bar most of them from selling bonds. Land sales make up 30 percent of local government revenue and in some cities account for more than half, according to a June 2011 report by Zurich- based UBS AG.
Policies related to the property sector -- including whether purchase restrictions in second- and third-tier cities should be relaxed, preferential policies for first-time buyers, and plans to extend the property tax experiment to more cities - - “will surely be debated” at the NPC, according to economists at Bank of America Corp.’s Merrill Lynch unit.
“We believe the central government will not ease its major property tightening measures,” the economists led by Lu Ting wrote in the report. “However, the government could step up its fine-tuning on several fronts.”
Changes may include further lowering mortgage rates and down-payment ratios for first-home buyers and encouraging developers to build smaller homes by providing favorable policies on loans and land, the economists said.
The NPC is legally the highest governmental body in China. While the legislature, with about 3,000 members, is often derided as a rubberstamp parliament, its members are some of China’s most powerful politicians and executives, wielding power in their home provinces and weighing in on proposals such as whether to impose a nationwide property tax.
Wu Yajun, China’s richest woman and chairman of Beijing- based Longfor Properties Co. (960), is a member of the NPC.
China’s home prices grew 6 percent in 2010 after surging 25 percent the previous year when the government started imposing curbs, according to the National Bureau of Statistics. Home sales rose 10 percent in 2011, the slowest pace in three years.
The government moved to stamp out speculation with measures including raising down-payment and mortgage-rate requirements, imposing property taxes for the first time in Shanghai and Chongqing, and home purchase restrictions in about 40 cities.
The result has been shrinking local government revenue. Land sales in Wuhu, a mid-size industrial city in the east and home to China’s sixth-largest automaker, fell 51 percent last year to 4.64 billion yuan from 2010, while they slumped 60 percent to 5.3 billion yuan in the northeastern industrial city of Dalian, according to SouFun, the nation’s biggest real estate website.
Local governments spearheaded a construction boom under a 4 trillion yuan stimulus program started in November 2008 after global credit markets seized in the wake of the collapse of Lehman Brothers Holding Inc. in September that year.
Property became the pillar industry in most second- and third-tier cities than in Beijing and Shanghai, which have more diversified industries and are considered more affluent, according to Mizuho Securities Asia Ltd.
“Desperate diseases require desperate remedies,” said Shen Jian-guang, a Hong Kong-based economist at Mizuho Securities. “Had the government not introduce the nationwide property tightening, it would be hard to control the risks of asset bubbles. But today smaller cities are feeling the bigger impact from the policies.”
First-tier cities include wealthier Shanghai, Beijing, and Guangzhou and Shenzhen in southern China, according to the statistics bureau. The second tier includes provincial capitals and the third includes smaller cities.
Wuhu in Anhui province had planned to waive a deed tax and subsidize some purchases, becoming the first Chinese city this year to signal its intention to ease property measures. The decision was halted three days after the Feb. 9 announcement, in a move reminiscent of Foshan, in the south, which in October shelved plans to ease limits on home purchases one day after its announcement.
‘A Blind Eye’
China’s home prices in January recorded their worst performance in at least a year, with none of the 70 cities monitored by the government posting month-on-month gains. China stopped releasing national average property prices in favor of individual cities in January 2011.
The eastern city of Wenzhou posted the biggest drop, with home prices declining 7.6 percent in January from the same period last year, according to the statistics bureau. A credit squeeze on smaller businesses in the city prompted a visit and pledge of financial aid from Wen in October.
There are signs the central government may be allowing some modest forms of property curbs relaxation. It “turned a blind eye” in the case of Zhongshan and Chongqing’s “policy fine- tuning,” according to CIMB-GK Securities Research Pte.
Mild Easing Allowed
“Local government officials are trying to read the mind of the central authority,” said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK. “It seems cautious, mild easing moves are allowed, while drastic relaxations are likely to be called off.”
Major Chinese cities also are attempting some form of easing. Shanghai on Feb. 22 reiterated its property curbs remain in place after a newspaper affiliated with the state-run Xinhua news agency reported the city will tweak its definition of locals to allow a broader pool of people to buy second homes.
Shanghai stated yesterday that the definition of locals excludes residence permit holders. That would leave out 671,000 in the city of 20 million who were issued residence permits as of March 2009, China Business News reported.
The measure tracking property stocks on the benchmark Shanghai Composite Index (SHCOMP) fell 3 percent at the close, the most in three months. China Vanke Co. (000002), the biggest listed developer on mainland exchanges, declined 2.8 percent to 8.28 yuan in Shenzhen trading, while its biggest rival Poly Real Estate Group Co. slid 3.3 percent to 11.1 yuan in Shanghai.
No Major Policies
“It’s very unlikely for the housing ministry to make any major policy moves ahead of the NPC, while local governments just can’t wait,” said Peter Bai, a Beijing-based property analyst at China International Capital Corp., the country’s biggest investment bank. The jostling between local and central governments will last for at least half a year, he added.
China’s central bank cut the amount of cash that banks must set aside as reserves for the second time in three months on Feb. 18. It also pledged on Feb. 8 to ensure that “loan demand from first-home families” is met, echoing a housing ministry comment in December that it will prioritize loans for first-home buyers.
“The central government wants to retain control of this easing process; they don’t want each city going off and operating on its own level,” said CLSA’s Rothman. “They need to be convinced that they have enough evidence that policies have worked before they start relaxing them.”
--Bonnie Cao. Editors: Andreea Papuc, Linus Chua
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